Home Depot denies LBO talks

CHICAGO (MarketWatch) - Home Depot Inc. on Friday denied it had held talks about a possible leveraged buyout as two large private-equity firms were reported to be preparing a $100 billion takeover of the home-improvement giant.

The statement, in what Home Depot called a reiteration of comments made earlier by Chief Executive Robert Nardelli, was contained in a filing with the Securities and Exchange Commission made after the close of regular trading.

"Reiterating comments made earlier today by [Nardelli], the company said that its board of directors unanimously supports the company's management team and its plan to continue enhancing value for all shareholders through the execution of its current strategy," the filing read.

"The company has had no discussion about a potential leveraged buyout or recapitalization," it said.

Fort Worth-based Texas Pacific and New York-based Kohlberg Kravis Robert & Co. were putting together the leveraged buyout of Home Depot, according to CNBC and the New York Post. Neither of the private equity companies would comment.

The reports sent shares of the Atlanta-based home-improvement chain
HD, -1.04%
up as much as 5.2% in intraday dealings, giving it a market capitalization of about $80.09 billion. The stock pulled back to finish the session higher by $1, or 2.6%, at $38.97.

Home Depot Chief Executive Robert Nardelli earlier downplayed the speculation, according to a report published in the Atlanta Journal-Constitution newspaper. Speaking to the Cobb County Chamber of Commerce in Atlanta on Friday, Nardelli said that it's not unusual for companies to be looking into acquisitions of other companies, according to the paper.

"On any given day, we are running numbers on lots of other companies," the Atlanta Journal-Constitution quoted Nardelli, who was referring to the number of businesses that Home Depot has bought in recent years.

"Somebody is probably running the numbers on us on any given day," he added.

Home Depot said that it does not respond to takeover speculation.

Nardelli, however, called the speculation an "unfortunate distraction" and said that he was "laser-focused" on running Home Depot.

Home Depot shares have climbed about 10% in the last two weeks as speculation has increased that private-equity investors were eyeing the company. Still, the stock is below its 52-week high of $43.95 reached in March, and it is 44% under its trading value five years ago.

Skepticism

Analysts were skeptical that the buyout could be pulled off. They're pegging the deal at about $45 a share.

Private-equity firms typically buy companies with little cash but lots of debt. Analysts believe that a Home Depot buy would be too loaded with debt, even when setting aside the difficulty in securing such hefty loans. The company already is sitting on about $8.1 billion in debt.

"We would be surprised if a deal of this magnitude were to come to fruition, as we don't believe the cash flow of Home Depot would support that type of debt load," Prudential Equity Group analyst Mark Rowen wrote in a research report.

Last year, Home Depot generated about $6.5 billion in cash flow from operations and spent about $3.9 billion in capital costs, mostly on new-store openings and remodeling of older ones.

Even if Home Depot were to suspend new-store openings, Rowen said, it still wouldn't be able to create a big enough cash flow to cover the debt.

The Prudential analyst said he thinks a highly leveraged owner of Home Depot would have to drum up a minimum of $7 billion to $8 billion in free cash, "which we believe is a tall order."

Deutsche Bank analyst Mike Baker, however, said he thinks the deal is doable -- assuming Home Depot's real estate is sold and leased back at about $75 a square foot. The company operates about 2,000 stores and analysts said it owns some 87% of its stores.

Bank of America analyst David Strasser estimated the real estate can add about $15 billion to a deal. "That still leaves a significant amount of debt that would need to be absorbed by banks and the public market place," he said in a note to his clients.

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